Archive for November, 2011
A quick update for Groove community members on our focus stocks – Inuvo and Vertro. Given the announced merger, the two have begun to trade in tandem as would be expected. While there continues to be some discount from the Inuvo price x 1.546 for Vertro shares, they have remained fairly consistent in mirroring the moves of Inuvo’s stock price. Hopefully, Groovers have taken advantage of the recent opportunity to buy Inuvo shares in the same price range ($1.05) as it was when we made our original recommendation. We believe the weakness in Inuvo shares is being driven by broader market volatility and year end tax loss selling; and we expect to see buyers of Inuvo stock in that $1.00 price range enjoying substantial returns 6 – 9 months from now.
It’s nice to see that the folks at Inuvo have been busy working to get their new apps out in advance of the Christmas shopping season rush that begins this week, we have noted the following over the last few days –
1) Kowabunga’s new interactive geo-specific ad unit is now live, see an example by clicking below –
2) Vertro’s Appbar has added a Kowabunga App to the shopping options for its 8 million+ Appbar users –
3) Inuvo’s BargainMatch browser extension has been accepted into Mozilla’s Add-ons directory –
We believe that Inuvo has built a very nice stable of apps that offer the potential for significant upside to Inuvo’s historic revenue run rate if the company can just get consumers to try them. The BargainMatch browser extension in particular offers significant utility and value for consumers who shop online and we think those who give it a try will keep it and use it. Getting accepted into Mozilla’s add-on directory is a nice win for the Inuvo team and what we hope to be the start of a series of deals to get the BargainMatch tool into the hands of more consumers.
Last week, both Vertro and Inuvo reported third quarter earnings. As expected, Q3 was difficult for both companies, but in each report and the conference calls that followed, investors were given reason to be optimistic on the prospects of each and for the potential of the combined enterprise. Our thoughts on the reports are below:
Vertro – as we discussed when in our “Time to Buy Vertro Again” blog post in September, we knew that Q3 would be challenging and fully expected to see a significant decline in revenue and other metrics from Q2 levels due to the changes in search engine results pages (SERPs) required by Google. These changes in SERP caused them to significantly pare down ad spending in June and July while the impact of these changes were assessed. As has been the case historically, such a reduction results in fewer new customers acquired and fewer searches, impressions and clicks. The timing of these changes and the reduction in ad spend causes a “double whammy” of sorts for Vertro’s revenue – 1) fewer searches, clicks and impressions means lower revenue generally and 2) Vertro’s contract with Google has breakpoints at which the company earns a higher percentage of the ad revenue and the declines discussed above led to the company’s falling below these breakpoints in each month of Q3. We note that the company’s ad spend was $5.2m, just like the prior quarters spend, but management indicated that the bulk of the ad spend occurred very late in Q3 which means we took the hit for this spend as an expense in Q3, but we should see the increased searches, impressions and clicks as a result of this spend during Q4 if historical trends hold true. Management shared the following notes about the trends in the final month of Q3 and early Q4:
1) Attrition rates improved across key markets, on a worldwide basis, due to better targeting as well as product enhancements.
2) Management believes that average daily revenue reached its bottom in Q3 and current rates are 20% above that low point.
3) The introduction of the new Homepage has resulted in significant improvements in revenue per install, with increases in revenue achieving average rates above 30%.
These trends and the other factors discussed above lead us to believe that the business has (in the words of Vertro CEO Peter Corrao) “..turned a corner and is poised for markedly improved results”.
Inuvo – Q2 and Q3 were transitional quarters for Inuvo and the changes made during this period led us to believe that the company would not only survive, but thrive going forward. As such and for all the other reasons stated in our initial due diligence report, we added Inuvo as a focus stock on the first trading day of Q4 (October 3, 2011). Obviously, much has changed about the outlook given the pending merger with Vertro, but we believe that these changes are positive and we fully expected Q3 to be challenging. We were quite pleased with the discussion of QTD improvements on the Q3 earnings conference call and found several reasons for optimism –
1) We believe that the GrooveVC community is having a positive impact on Inuvo and the numbers for Q4 to date are the best evidence – management indicated that they have experienced an uptick since the start of October that pushed their revenue for the month to $2.9m, substantially higher than the prior month’s $2.2m. While it is difficult to know with certainty how much of this gain was related to the adaptation of Yellowise, BargainMatch and Kowabunga into the daily use flow by Groove community members, we do not believe that the timing of Inuvo’s revenue rebound is a coincidence and we fully expect to see the company report revenue at this higher run rate going forward. We note that management also indicated that revenue for November through the day prior to the call were running at about the same daily rate.
2) Recent headcount/expense reductions were implemented with a stated goal of creating an expense structure that allows for positive adjusted EBITDA at the revenue level reported for September ($2.2m) which we expect to represent a revenue trough. We believe that this will allow the company to operate profitably going forward as best evidenced by management’s comments that the company was able to achieve adjusted EBITDA in October of approximately $170k with trends looking for similar for the first week of November.
We expected weak Q3 numbers and felt that a poor Q3 was being priced into the shares. Of course, given the merger we expect there to be significant volatility in the stock price until the deal closes and also would not be surprised to see weakness related to end of year tax loss selling. We note that the stock has already traded back down to the price at which we initially suggested that Groove members take a position ($1.05 on October 3) and we believe that any such end of year weakness makes for a tremendous buying opportunity, as we expect the results for a Inuvo/Vertro combination will be much stronger than either could achieve individually and believe that the combined company’s stock price will move considerably higher over the next 12 months.
As many of you are probably aware, we narrowed the “new focus stock” recommendations from our community down to two companies before naming Inuvo as the focus stock. We believed that both finalists were significantly undervalued based on their prospects and that each would benefit tremendously from consumer’s and investor’s growing fascination with daily deals and coupons. Local.com was the other company and our decision to choose Inuvo ultimately came down to geography and our focus on community involvement to drive gains in operating results. When the decision was made, Local.com’s Daily Deals business was exclusively offered on the west Coast, Chicago and in Utah. Given the wide geographic distribution of our participants, many would have been unable to participate in the local deal offerings that are among the major reasons the two were chosen. Inuvo through its BargainMatch and Kowabunga Daily Deals properties offer daily deals nationwide, with the latter scheduled to roll out daily deals in many “secondary” markets not addressed by any of the daily deal companies sometime of the next couple of months. Thus, we chose INUV as our focus stock, but it is apparent that quite a few of our participants also have significant positions in Local.com.
Since the Inuvo/Vertro merger was announced, I think many of us have been eagerly awaiting the Local.com Q3 earnings report for reasons beyond our ownership of the shares. Early in Q3, LOCM signed a deal with Google to offer Google’s Pay Per Click ads on its “owned and operated” web properties. Though LOCM only starting using the Google feed on August 1 and the switch from Yahoo/Bing ads to Google ads was on the SERP landing page only, LOCM announced a large increase in revenue per visit. They essentially replaced the one ad unit on the right margin that usually had a Yahoo/Bing feed with a 3 ad Google feed. Live for only 2 of the three months in the quarter, the Google ad unit drove a 30% increase in revenue per thousand visitors for LOCM for Q3.
We believe that this is a great example of the potential of the Vertro/Inuvo merger. Vertro’s “Google Network” contract will allow the Bargain Match, Yellowise and BabytoBee sites to be monetized using the Google Ad feed, which may drive even larger gains for Inuvo’s consumer facing properties (all of whose revenues are driven largely by search). We believe that the disparity between what Inuvo likely earns on its Bing/Yahoo feed and what they would earn with PPC ads provided by a “Google Network” member like Vertro will be even larger than the difference between what LOCM was earning from its Yahoo contract and what they earn now from their Google contract. Investors need to understand what it means to be part of the “Google Network” – these are the highest traffic volume websites that partner with Google – AOL, INSP, IACI and Vertro. An advertiser can typically choose any site to include or exclude in his ad campaigns, but that is not true for the “Google Network”, which is an all or nothing choice for each advertiser. The practical impact of this setup leads there to be more advertisers running ads, bidding on ads, etc. for any given keyword searched for a Network partner, which drives higher RPC for the Google Network partners vs. a standard Google AdWords partner. Thus, we would expect to see each of these web properties go from mildly profitable at the operating level to being wildly profitable and/or experiencing large revenue gains the first quarter that the Google Network feed is introduced to the mix.
One of the things we believe is most overlooked about Inuvo and its Bargain Match service is the coupon component. Certainly, much of the sizzle relates to its ability to notify consumers of cash back opportunities at over 1900 merchants and do so without changing the flow of their shopping patterns (ie by just putting the little green sale tag beside each website in your Google search results that offers cash back), but Bargain Match is also one of the most comprehensive resources for coupons online. Mouseover that little green tag in the search results and you will see not only what % cash back they offer, but also all of the coupons that merchant offers to online shoppers. For instance, when I entered the term “iphone accessories” into my Google search engine, 6 of the 10 websites on the Google results page offered the little green tag and when I mouseover the green tag, I can see five or six different coupon offers each from the official Apple Store, Best Buy, At&t, Buy.com, CellPhoneShop.net, etc. and it has a simple “click to activate” button beside each one that will take you to the site, where one more click will apply the coupon code to your shopping cart. I clicked through on the “CellPhoneShop.net” website and the coupons allowed me to get $10 off my $50 order in addition to applying 13% cash back to my BargainMatch (or ALOT Cash Back Rewards for Appbar users) account. The price on the items were actually better than at my local At&t store for the same items before the discount and it included free shipping, so it is a win-win-win deal for the consumer. With over 1900 merchants including almost every major retailer you can think of, the Bargain Match service essentially offers the best coupon site online in addition to the cash back feature it is best known for.
One of the reasons I chose to focus on the coupon aspect of the Bargain Match service is not the recent “return of the coupon” to widespread consumer consciousness that could be attributed to the difficult economy or perhaps to the proliferation of the daily deal sites like Groupon, Living Social and Kowabunga (yeah, thats right), rather we have chosen to call it to your attention because of the investment community’s recent and growing fascination with coupons. Within the last 30 days, the following funding deals have grabbed our attention –
1) Coupons.com – earlier this month raised $30 million from highly regarded VC Greylock Partners, on top of the $200 million raised in June. The valuation on these placements puts the company’s enterprise value in excess of $1 billion
Link – http://www.businessinsider.com/coupons-com-billion-dollar-valuation-2011-6
2) CouponCabin.com – last week Coupon Cabin raised $54 million from venture capitalists. While we have not been able to verify the total valuation, we do know that the $54 million investment was for a minority stake, so the implied valuation for this round would be in excess of $108 million.
3) CouponTrade.com – 2011 startup received $2.4m funding earlier this month – http://www.portfolio.com/views/blogs/daily-brief/2011/10/20/coupon-cabin-grabs-54-million-in-funding
4) Coupon Express – just this week a Pink Sheets listed company that just changed its name from PSI Corp completed a convertible issue raising another $1.5 million that appears to push their enterprise value to $12m+
We note the first two deals as indicators that big VC money has recently warmed to the potential value of web based coupon offerings. We offer the last two as examples of startups and/or “me too” companies jumping on the coupon bandwagon that already have valuations that exceed the entire current market cap of Inuvo. While three of the four companies above are a slightly different kind of couponing service (grocery store or daily deal focused),we note that the deals offered on the $100m+ valuation CouponCabin are in many cases the same deals offered through BargainMatch, except that Coupon Cabin does not offer the cash back component on top of the coupons that BargainMatch offers. Certainly, Coupon Cabin has one key advantage in that it has been around since 2003, while the BargainMatch service has only been around for about a year and the browser extension has only had a few months to build up its user base. Given time, exposure and better distribution; we believe that the high consumer value and utility of the BargainMatch service could allow it to be one of the leaders in the coupon space, generate significant revenue (Q4 will be first full quarter of BM browser extension) gains for Inuvo and hopefully gain some recognition among investors of the potential value of this company.